The end of the Great Keynesian Experiment is upon us. Prepare accordingly.

Tuesday, December 14, 2010

Two Important Updates

Good evening, my dear reader, wherever you are. It is about 10:00 pm EST here in the U.S. but I felt compelled to update and extend two recent posts.

First up is a post from yesterday called "Buck an A". (Cute, huh?) Please review it by clicking here:http://tfmetalsreport.blogspot.com/2010/12/buck-a.html
I'd intended to write the post about the sinking dollar but, in my research, I noticed that the always dangerous "Poseidon's Anchor" formation had clearly formed on both the 10-year note and long bond charts. The anchor formation leads to a near-term bottom which is the opposite, technically speaking, of a parabolic, blow-off top. At the time I wrote the post, I commented that the drop in treasury prices looked to only be about half over. To the casual observer, that might have sounded silly however, after another 2-point plus drop today, the anchor is proving once again to be a reliable indicator. Here again is the chart from yesterday:

Tonight, the 10-year note stands a shade above 119. The long bond future is about 119 and a half. The anchor predicts lower prices are still coming and coming soon. Both will likely reach a short-term bottom somewhere around 116-117, probably by Friday. The challenge for me is to figure out what, if anything, this means for the PMs as we go through the rest of the week. I'm going to need to think about that one because, frankly, at this point, I'm not sure.

For short-to-intermediate term metals prices, more significant information is contained in this post below. This is from last week so please take a moment to refresh your memory:http://tfmetalsreport.blogspot.com/2010/12/kwn-on-bos-must-read.html
Late today, Eric King blogged another interesting tidbit from his "source" at the LBMA. This is significant because his "source" has been so accurate. Take a moment to read this:http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2010/12/14_KWN_Source_-_When_That_Happens,_The_Game_is_Over.html
I'm starting to get very interested (excited) that we are on the verge of a major move in metals prices. If this all comes to pass, and Santa is vindicated with a $250 move in gold over the next month....well, let's just say that the guy should be deified. Either that or put on trial in Salem as some kind of witch. In any event, I'm strongly considering violating one of my cardinal trading rules, namely, purchasing a large quantity of out-of the-money, front-month options. As you should know by now, this is a type of trade works, oh, about 0.127% of the time and it is almost guaranteed to wipe out your trading account in short order. However, tonight the Feb11 $1550 gold calls, which expire on 1/26/11, are trading at 2.50 which means they cost $250 each. If Santa is correct and gold trades at $1650 by 1/14/11, each call will be worth $10,000 at a minimum. Hmmmm. Now you see why I'm considering pissing away a few dollars tomorrow. Between Santa, Eric King, the crashing bond market, the euro contagion, the JPM squeeze and on and on, I almost think its crazy not to own some way out of the money calls. As always, I'll let you know if I actually pull the trigger.

OK, that's it for today. An amazing day, at that, as we had our most pageviews ever. Over 14,000!
Thank you all again for making this endeavor successful way beyond my wildest dreams. Turd out.

Near-term, far out of money options are indeed lottery tickets (and expensive ones at that) -- but we should see indication as to whether the $1.65K/oz scenario is possible soon. Look forward to your conclusion on bonds vs. PM. Thanks again for all our work on the blog, TF.

Call me a gambling fool, Turd, but your take on the 1550 calls looks good to me...so good that I just placed an order to try and snag a couple, even though I know that options are essentially lottery tickets 99% of the time (and I made sure to use a day order and not a GTC order since the decay is very rapid with only 43 days to go; don't want to overpay!).

On silver, my (big) gut feeling is that once it pops through 30, which looks to be soon, there ain't nothing but a lot of blue sky after that. We shall soon see.

Boy that TLT chart w/ huge volume pushing at the bottom looks really ugly. Fed is probably gonna freak out and dispatch EE to jerk around in the coming days but the uptrend is here w/ the Chinese draining the physicals.

As far as Jim Sinclair's now-famous prediction ($1650 gold by Jan. 14, 2011) is concerned, you have to bear in mind that he added this rider, which I paraphrase: if gold is not at $1650 by Jan.14, 2011, it will reach Martin Armstrong's number (gold at $5000) by June 2011. You also have to bear in mind that Jim is not jubilant about such a forecast because he knows that if we hit $5000 gold that soon, the sky will have definitely fallen in. Think Germany in June 1923.

BTW, I have Jim's forecasts up to gold $2025 in the form of one of his brilliant 'gold angel' cartoons in case you haven't come across it on jsmineset.com. Drop me an email and I'll send it to you.

USD strengthening this morning on Spain/Moody's news. Santa (www.jsmineset.com) thinks this is the usual Euro manipulation, a setup. No doubt Blythe will pile on and try to take down PMs. Another gift for the BoS.

Forget 1650 as of mid january. Be happy if you see 1500 somewhen in january and 1600 end of march. My friends - you are getting carried away.

Disclaimer: I'm long too - but I don't like the sentiment here. That is the stuff we we see sell offs. Remember what I posted yesterday about the DAX. Today it made lower lows. And rmember what happened after the last POMO announcement - we sold off.With to big POMO days now - again: better pray that there isn't another sell off.

Relax hamster. The way bonds are falling, you'd expect Fed to try all sorts dirty tricks to engineer a form of strength in Dollars. This Spain thing and the overnight PM rigging are part of it. You are fine as long as not too loaded on margins.

"...This supports our view that gold physical buying should on average outpace selling into December, i.e. our index should on average remain in positive territory. Furthermore, we expect gold physical demand to prevail on dips into January - Indian demand should remain positive until at least mid-December on the back of wedding season. However, it may become more sluggish should the gold price rally to fast. Gold has not only reached new highs in dollar this week, but also reached new highs in euros and Indian rupees (and a few other currencies). However, we still have the festive seasons in the Western Hemisphere as well as Chinese New Year the next 6 weeks. In 2011 Chinese New Year is on 3 February. We are growing in confidence that physical gold demand in continues to prevail on dips."

"...The average week for the silver price had a spike higher on Monday, followed by a correction starting on Tuesday and ending Wednesday with a renewed uptrend into the weekend. On average, the best day to buy silver was Wednesday – especially if after a Tuesday takedown. The best day to sell silver was late Monday. Interestingly this pattern strongly corresponds to the COT report release cycle."

"There was movement in both ETFs yesterday. GLD showed a withdrawal of 97,628 ounces... and SLV took in an eye-opening 2,345,716 troy ounces... well over one day's worth of world silver production. And don't forget that the Zürcher Kantonalbank in Switzerland took one day's worth of silver production into inventory last week as well. So, in the last ten days, about 23% of world silver production disappeared in these two ETFs."

I see the DXY holds support during the next debt bomb Spain. Maybe we get a rally in the HUI and the DXY. Folks know that the euro is dead money. Bonds are at the tipping point

I say hold your powder in this thin volume and be long the GDXJ or juniors with Silver miners of choice.

But Gary Savage writes this.

Dollar:Things just got complicated today with the dollar as we have a potential failed cycle in the making. If we see follow through to the downside then we are going to have to entertain the idea that the 3 year cycle decline again has it’s hooks in the dollar. If that’s the case it’s going to make it tough for stocks and gold to correct. We could see a runaway move develop…probably not in stocks, but possibly in gold (now you see why I suggest you keep a core position)

A joke on the streets of Moscow these days: "Everything the Communists told us about communism was a complete and utter lie. Unfortunately, everything the Communists told us about capitalism turned out to be true." —John Nellis, World Bank

Funny. I just bought the march 35 calls in silver yesterday. Cost me 62 cents. Its a roll of the dice. Big upside and I know my downside. In a trade like this you have to be comfortable losing all that you put in. If you made some good money trading silver or gold why not book some profits and use that money to swing for the fences. It's always been a good strategy for me.

Re: Eurozone, no OECD country can be allowed to fail because of Tier 1 Capital rules under Basle (Basel)...they are Zone A bonds and "as good as cash" for reserves, so, zero provisions, so ONE OECD sovereign failure and every bank in the world is kaput...my summary of his point.

I agree wholeheartedly with your strategy. Seems to me that options should be looked upon as "insurance" to make sure you capitalize and profit maximally on a sudden tremendous upswing.

For everyone, and perhaps particularly goldhamster (whose views I find particularly prescient): I am not sure I understand why a flight from bonds would hurt PMs. I understand the "conventional wisdom". But most here have understood the flaw in "conventional wisdom". My view is that if bonds implode, isn't there a rush to SAFE HAVENS. In these current time, what is a better safe haven than silver and gold? Particularly in the eyes of the Asian BoS???

Daniel said: "My fears are rather panic sell off in bonds followed by panic sell offs in everything else, and silver breaching 26,50 or even 25." Wouldn't there be a rush of all that money from selling into something of value, or at least perceived as the best value??

Same with interst rates -- I understand that USUALLY this means a flight from PMs, bc PMs "don't give out dividends". But who cares about dividends when you are safely storing your wealth?? Isn't that missing the forest for the trees?

Cris, I also think that Asian investors will see PMs as a safe haven. As the SHTF, PM prices (I think) will gyrate wildly as investors in some countries panic sell PMs and in other countries panic buy them.

Cris, I see your point and in the mid-term this should hold true. But what happens in the short term?If we say the bond people go into PM without hesitation then everything is fine. But aren't we then attributing "logical behaviour" to people that up to do behave completely stupid? I mean, how else could one describe the buying of debt of a bankrupt country denominated in fiat money that is continuously printed?!

To sum up, the question is: Will there be a short-term correction after a bond bust and if yes, how strong will this correction be?

Marcus, it looks like the BoS can't get the physical right now. My take from the KWN article is that the BoS is buying spot gold XAU/USD and spot silver XAG/USD contracts, and then taking cash settlements (with a premium?), the idea being they commit that cash to more and more trades, building larger and larger positions. And eventually they insist on a massive physical deliveries.

"Much like trading currency pairs, spot gold enables traders to take a long or short position in gold while simultaneously taking the opposite position in the U.S. dollar. Spot gold trades globally in an over-the-counter market, and gold prices float freely based on supply and demand. The spot price is the price quoted for the gold to be paid for (including delivery) two days following the date of the actual transaction (also known as the settlement date). Spot gold trades a lot like currency pairs in the foreign exchange market. Trading is available 24 hours a day from Sunday at 6:00 pm ET to Friday at 5:00pm ET. The spot gold market has no central market however, the main centers for gold trading are London, New York, and Zurich. Liquidity is typically highest when European market hours overlap with trading in New York - roughly four hours a day during the morning for U.S. traders. There is a twice-daily fix in London that helps to set a reference point for intraday gold prices. Settlement is very similar to forex settlements."

Thank you, sumo, much appreciated. Basically then, the entities buying spot sell it back at a premium, plow the proceeds into spot once again, and so on and so forth in a ponzi-esque, pyramid scheme; a positive feedback loop that works until it doesn't. Yes?

The ten year note has been in an uptrend (yields down) for all of my adult working life. Thirty years. The road is littered with damaged portfolios betting on a change in that trend. Myself included (2004).

A higher gold price is in the best interests of the United States. Rickards posits a force mejeure at the FRBNY is a possibility. He should know. That, combined with the Ft. Knox and West Point hoards would bring the total up to 16,000 tons.

Consider the CFR scholarly articles advocating both the sale of US gold reserves to cover liabilities, and the return of gold as a world currency, to be signals of the highest order. This will all work in our (savers) favor.

Marcus, I just "spoke" to a forex on-line help service. "Spot" contracts are settled for cash only. No physical settlement is involved. So I guess no extra premium is involved. But the contract tracks the price of the physical commodity.

I think the point of the KWN piece (and it took me a while to figure this out) is that the BoS are keeping their money in PM-demoninated assets (the XAU/XAG) WHILE at the same time also buying (the dips) as much as possible. Genius, no? Every time they buy, they also take "profits" in the form of their swaps going up in value -- and thus have added ammunition to buy with the next time - ad infinitum. If it weren't for the transactional costs and the overhead, it would be a great strategy for others to emulate...

CD: You got it. They create a virtuous cycle or positive feedback loop, however you want to look at it. The rest of us that aren't the BoS just need to get on one side of their trade, stay there and enjoy the ride.

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About Me

"Turd Ferguson" has been involved in the securites "industry" for over 20 years. He first received his NASD licenses in June of 1990. Ultimately disgruntled by the fraud known as "financial planning", he retired to a career as a serial entrepreneur in 2008. The Turd is NOT a soothsayer, a psychic or a witch. After all these years, he simply has a decent handle on the PM "markets". You can reach The Turd by email at tfmetalsreport@gmail.com. If you are polite and not an AGA, he will probably answer you in short order.

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